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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 1998
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 0-26608
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CUTTER & BUCK INC.
(Exact Name of Registrant as Specified in Its Charter)
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WASHINGTON 91-1474587
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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2701 FIRST AVENUE, SUITE 500
SEATTLE, WA 98121
(Address of Principal Executive Offices, Including Zip Code)
(206) 622-4191
(Registrant's Telephone Number, Including Area Code)
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Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
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TITLE OF EACH CLASS
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Common Stock, No Par Value
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value as of July 24, 1998 of the voting stock held by
non-affiliates of the registrant was approximately $147,567,116. As of such
date, there were 5,427,756 shares outstanding of the Registrants Common Stock,
no par value per share.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Portions of the registrant's 1998 Annual Report to Shareholders are
incorporated by reference into Parts II and IV hereof; and
(2) Portions of the registrant's definitive 1998 Proxy Statement to be filed
with the Securities and Exchange Commission are incorporated by reference
into Part III hereof.
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PART I
ITEM 1. BUSINESS
OVERVIEW
The Company designs, sources and markets its distinctive Cutter & Buck brand
sportswear and outerwear primarily through golf pro shops and resorts, corporate
sales accounts and better specialty stores. The Company has developed a
colorful, innovative collection of sportswear apparel targeted to the upscale
market, projecting an updated American design evocative of a golf-inspired
lifestyle. The products' high-quality fabrics and detailing reinforce the
premium image of the brand while the fit provides versatility and a feeling of
comfort. Product marketing connected with sports and leisure activities,
particularly golf, helps the Company create a positive lifestyle image that
contributes to the brand's strong appeal for its target consumers. The Company
benefits from the trend toward greater acceptance of relaxed standards of dress
in the workplace that results in sportswear representing a growing portion of
consumer wardrobes. Since its formation on January 5, 1990, the Company has
achieved consistent annual sales increases, realizing net sales of $70.1 million
and net income of $5.7 million in fiscal 1998.
The Company has selected golf pro shops as its primary channel of
distribution, believing this to be an effective venue for reaching its target
consumers. Most golf pro shops have welcomed quality apparel that is not broadly
distributed elsewhere as an important offset to declining sales of golf
equipment due to price competition from golf discounters. By providing in-store
fixturing and training in merchandising Cutter & Buck products, the Company
assists golf pro shops in maximizing their apparel revenues. The Company sells
Cutter & Buck products to approximately 3,000 of the estimated 14,000 U.S. golf
pro shops. The golf distribution channel accounted for approximately 52% of the
Company's net sales in fiscal 1998, and the Company expects continuing growth of
sales to this channel. The Company also distributes its products primarily
through the following distribution channels: direct corporate sales accounts,
better specialty stores, and internationally through its European operating
subsidiary, and various licensees and distributors.
The Company generally markets its men's products each year as two seasonal
collections, spring and fall, presenting each collection in several groups of
distinct, coordinated products available for delivery to customers during
sequential time periods. In fiscal 1998 the Company introduced a women's line of
apparel, and plans to ship one collection for each of the 1999 and 2000 fiscal
years.
MARKET
According to industry estimates, total sales of apparel at retail was $169.2
billion in 1997, with $50.8 billion and $89.4 billion spent on men's and women's
apparel in 1997, respectively. Across all clothing categories, sales were
strongest among Americans with household incomes over $60,000, who accounted for
40% of the total apparel spending in 1997. Within this market, the Company
targets men and women who are sports-minded and want casual clothing that
reflects an active lifestyle. The Company believes that these consumers also
want comfortable, distinctively styled, high-quality apparel. The Company
believes that, with an increase in the number of working women, men are
purchasing more of their own clothing. Many of these men are busy professionals
who prefer to spend their limited free time pursuing sports and recreational
activities such as golf, rather than spending time shopping in traditional
retail outlets, such as department stores and shopping malls. The Company
believes these time-constrained consumers are inclined to purchase apparel
relating to their sporting interests if available at a sport location such as a
golf course. Increasing numbers of women, many of whom are also professionals,
have requested the same type of quality and sporting-inspired sportswear apparel
previously designed and marketed for men.
Sportswear represents a growing portion of consumers' wardrobes as a result
of a trend toward greater acceptance of relaxed standards of dress in the
workplace. This segment of the market has grown faster
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than the overall men's apparel market in the past three years. Knit sport shirts
as a category is also showing strong sales growth, which the Company believes is
in part attributable to this trend.
PRODUCTS
Cutter & Buck is a lifestyle brand of high-quality, sports-inspired apparel.
The Company's products use strong, clear colors, high quality natural fiber and
performance microfiber textiles, rich detailing, innovative fabrications and
trims, and specialized printing and embroidery to achieve this identity. The
Company merchandises its products as color- and design-coordinated collections
comprising knit and woven sport shirts, pants, shorts, sweaters, sweatshirts,
outerwear and caps. The Company frequently uses golf, tennis and other sporting
themes to evoke the Cutter & Buck lifestyle.
Cutter & Buck's distinctive products use fine-gauge combed cotton or virgin
wool yarns, unique trims, special fabric finishes and washes, and extra
needlework. They are manufactured in factories selected for their resources and
their ability to ensure quality in the production process. The products are
styled and sized to provide versatility and a feeling of comfort.
The Company offers two collections a year, spring and fall, composed of
FASHION and complementary CLASSIC products. FASHION products incorporate the
latest innovations in color, fabric and styling and tend to remain in the line
for only one season. The Company develops proprietary fabrications, artwork for
its complex prints and distinctive trim components in cooperation with
experienced sources worldwide.
CLASSIC products are predominantly solid-color garments with multi-season
appeal. The Company relies on the styling, detailing, coloration and quality of
its fabrics to distinguish its CLASSIC products from competitive products. The
Company generally prices its CLASSIC products at levels lower than its FASHION
products, which permits its customers to offer Cutter & Buck products at a range
of price points. Higher per-item volumes for CLASSIC products allow the Company
to achieve production efficiencies and lower costs. CLASSIC products are sold
throughout the year to all of the Company's distribution channels, which
accounts for approximately 45% of the Company's annual revenues.
The Company presents each season's collections to its customers in several
groups of distinct, coordinated merchandise. These groups are available for
delivery to customers during sequential time periods, generally from May to
October for fall collections and generally from November to April for spring
collections. Customer-initiated product reorders can often extend the delivery
period for a season by up to three months. The product mix changes seasonally,
including more sweater styles in fall collections and more short-sleeve shirts
in spring collections. The Company's ability to offer merchandise collections is
a strategic advantage over many of its competitors since its customers generally
prefer to purchase compatible assortments rather than assembling coordinated
merchandise from various brands that do not share common colors and themes.
A substantial percentage of the Company's products that are shipped to the
golf distribution channel are embroidered with golf club names or logos. In May
1996, the Company established an in-house embroidery operation to reduce costs,
shorten delivery time and enhance quality control of its embroidered products.
The Company's increasing volume of sales to the corporate distribution channel
also involves embroidery of the product with corporate logos, either performed
or arranged by Cutter & Buck or by its corporate customers. The Company believes
its customers' strong interest in affiliating their identities with Cutter &
Buck brand products affirms the desirability and distinctiveness of its
merchandise.
DOMESTIC DISTRIBUTION AND SALES
The Company's products are distributed in the United States primarily
through three channels: golf pro shops and resorts, corporate sales accounts and
better specialty stores. Each of these channels uses CLASSIC and FASHION
products from the Company's seasonal collections. The Company believes that
these
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channels are synergistic, since they have compatible merchandising and pricing
practices, sell the same product line and create heightened awareness of the
Cutter & Buck brand among the Company's target consumers, who tend to shop in
more than one of these channels. For example, many of the Company's corporate
sales leads have come through corporate executives who have purchased the
Company's products at golf pro shops and resorts.
The Company sells to golf pro shops and resorts through a commissioned sales
force. At the end of fiscal 1998, the Company's sales force for this channel was
composed of 33 representatives (24 of whom are Company-employed and 9 of whom
are independent). These representatives present the Company's collections to the
Company's customers with the aid of full sample lines and pictorial line books,
which offer critical information needed by the customer. These presentations are
made at the twice-yearly PGA Merchandise Show, at regional trade shows and at
the customer's shop or resort. The sales force collectively covers the entire
United States and is managed by two regional sales managers, who report to the
Company's Vice President of Sales.
The Company also sells its merchandise to major corporations using a sales
force of both Company-employed representatives and independent, multi-line sales
representatives. As of the end of fiscal 1998, this sales force numbered 27 (of
whom 16 are Company employees), an increase from 19 at the end of fiscal 1997.
CLASSIC products and in-stock FASHION products are sold to corporate customers,
since these customers typically demand immediate delivery. The products are used
for corporate golf events, stores, catalogs and recognition programs. Nearly all
these products include embroidery with the corporate logo, which is either
performed by or arranged by the Company or by its corporate customers. The
Company manages its corporate sales through a national corporate sales manager,
who reports to the Company's Vice President of Sales.
At April 30, 1998, the Company employed eight sales representatives selling
to better specialty stores, including the big and tall market. These
representatives present the Company's FASHION and CLASSIC collections each
season at national and regional trade shows and at the customers' stores. These
specialty store representatives are managed by a retail sales manager, who
reports to the Company's Vice President of Sales.
Each sales representative is responsible for serving targeted accounts in a
specific geographical territory through merchandise consultation and training,
and for meeting specific account growth and average-order-size goals. They are
also responsible for implementing the Company's merchandise fixturing program
with all suitable golf pro shops, resorts and specialty stores. Because the
Company believes that its Company-employed sales representatives generate higher
productivity and the interests of the sales representative are more closely
aligned with the Company, the Company intends to continue to increase the
percentage of its sales representatives who are Company-employed.
MARKETING
The Company's marketing goal is to build a strong brand name and image with
both its customers and the end consumer, specifically targeting the upscale
market. The Company expects to build strength in its brand name through the use
of sporting theme associations favored by its target market, lifestyle
merchandising and in-store marketing techniques, endorsements and advertising.
The Company portrays its brand image of an American sporting lifestyle by
creating seasonal merchandise collections that are theme- and color-related.
Themes commonly used by the Company are golf, tennis and other activities which
reinforce this image. The Company believes that, by featuring these sports, its
products will appeal not only to participants, but also to those who identify
with this lifestyle.
These lifestyle merchandise presentations are sold and shipped to customers
in collection groups in order to reinforce the overall conceptual strength of
the product offerings. The Company's distinctive in-store fixturing program
showcases these collections and enhances its brand image at the point of sale.
The
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fixtures, which are identified with the Cutter & Buck trademark logo, are
designed to display assorted elements of the Company's collections and allow the
consumer to easily assemble and purchase coordinated outfits of shirts, pants,
shorts, sweaters, sweatshirts and outerwear. The Company also offers display
mannequins and logo signage in order to complement the fixturing and create an
environment that enhances the Cutter & Buck brand image. In fiscal 1998, the
Company initiated its first concept shop partnerships, an extension of its
fixturing program. While the customer provides the square footage and certain
construction costs, the Company provides shop design and high quality fixtures
to create a shop within a shop environment dedicated exclusively to Cutter &
Buck merchandise. With a higher minimum order requirement from the customer,
this program is targeted at the premier pro shops and resorts in the country.
The Company believes this program will generate stronger, mutually beneficial
business relationships with its top customers by increasing their sales volume.
As an additional service, the Company's sales representatives are trained
and available to assist customers in merchandising the Company's product lines.
This is particularly important at golf pro shops, where the customers or shop
owners are receptive to the sophisticated apparel merchandising and selling
techniques, as apparel is a relatively new element of the pro shop business. The
Company's representatives also organize and participate in sales contests,
special event mailings and promotions with their customers. The Company believes
this level of service and expertise differentiates it from its competitors in
this market.
The Company is committed to responding flexibly to the special needs of pro
shops, tournament organizers and corporate customers who order the Company's
products. The Company has developed an in-house embroidery operation and also
works with independent embroiderers to service the needs of golf pro shops and
resorts, which generally prefer that the products they order be pre-embroidered
with the name or logo of the golf club or resort. This customized embroidery
enhances the customer's image due to the quality and uniqueness of the Cutter &
Buck product and simultaneously reinforces the prestige of the Cutter & Buck
brand. Virtually all of the Company's products sold through the corporate sales
channel are sold with a corporate logo, which similarly enhances both the Cutter
& Buck brand and the corporation's image. The placement of the Cutter & Buck
embroidered logo on the left sleeve, the cuff, or at the top center back of its
knit shirts allows the Company to accommodate more easily the desire of pro
shops, tournaments and corporations to have their name or logo placed on the
shirt's left chest.
Cutter & Buck supplies its apparel to a number of promising professional
golfers on the PGA Tour, the Nike Tour and other tours. It is expected that
these professional athletes will influence the golf apparel preferences of pro
shop customers and consumers. The Cutter & Buck logo is positioned prominently
on the Company's shirts and sweaters worn by these golfers, making it visible to
those watching tournament play, either on site or on television. Beyond the cost
of making its apparel available to professional golfers, the Company has not
spent, and does not expect to spend, significant marketing funds on professional
endorsement contracts due to the high cost and risks of associating the Cutter &
Buck brand with the performance of only a few top-ranked golfers.
The Company is continuing to build relationships with national golf
tournament organizations such as the Professional Golfers Association of America
and the United States Golf Association and actively participates in merchandise
vendor and license programs for events such as the PGA Championship and the U.S.
Open. The Company obtains the rights to embroider the logo of major tournaments
on Cutter & Buck products and makes them available before and during the events.
These high profile events appeal to a large portion of its target consumers, and
the Company believes its association with these events enhances the visibility
and desirability of the Cutter & Buck brand.
The Company believes that it can accelerate brand recognition through
increased expenditures of targeted magazine advertising and point of sale
promotions to create consumer demand for its products. Consistent with its
expansion strategy, the Company advertises in national and regional trade
magazines and produces photographic renditions of its new product lines for
national distribution to its existing
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customers to expand their awareness of the Company's product lines. The Company
also produces catalogs of its CLASSIC and outerwear products to be shipped to
its customers for in-stock reordering purposes. In addition, the Company has an
Internet home page on the World Wide Web at http://www.cutterbuck.com, where it
provides product information and pictures of its products and responds to
inquiries about the Company and its products.
INTERNATIONAL DISTRIBUTION AND LICENSING
The Company has an operating subsidiary in The Netherlands for the purpose
of marketing and selling its products in Europe. In fiscal year 1998, the
Company strengthened the management of its international operations with the
addition of a new Vice President International/Managing Director of Cutter &
Buck B.V., who directs the operation of its European subsidiaries and advises
the Company on international marketing and product sourcing issues, a Vice
President of Sales and Marketing and a Vice President of Finance and
Administration for its European operations.
The Company also has licensees that have contracted for the right to
manufacture and market Cutter & Buck designs in specified international markets,
including Japan, Hong Kong, China and Canada. Cutter & Buck license agreements
generally provide for three-year terms and provide for royalties as a percentage
of sales. Most agreements contain annual royalty minimums, and all agreements
give Cutter & Buck final control over product design and quality. These
licensing arrangements enable the Company to broaden the geographic distribution
of products bearing the Cutter & Buck name.
The Company's decision in recent fiscal years to emphasize direct
international sales and exclusive distribution relationships rather than
licensing relationships has resulted in a decline in license and royalty income.
The Company currently has a product licensing agreement for hosiery. The Company
recently reacquired its license covering collections for the big and tall
market.
In addition, Cutter & Buck has agreements with international distributors in
Australia and Singapore and Malaysia. These distributors buy the Company's
products at reduced cost for resale in their respective markets. The products
offered for distribution in these territories are identical to the products
offered in the United States, and these distributors often use the Company's
marketing technique of offering the products in collections identified on
pictorial line books. The Company's relationship with its distributors are
managed by an international merchandise manager, who reports to the Company's
Chief Executive Officer.
PRODUCT DEVELOPMENT AND SOURCING
The Company's concept of updated traditional sportswear and outerwear is an
established category within the apparel field, relying upon historical American
design sensibilities. Changes of color, fabric and body shapes in this category
are not rapid, thereby allowing the Company's product development team to
evolve, rather than reinvent, the product each season. This provides stability
in the design environment and consistency in the Company's conceptual offerings
to its customers. The Company's product development team is comprised of various
executive officers and the Company's design staff. The team's purpose is to
determine product strategy, color and fabric selection and assortment of styles,
which is accomplished through a series of meetings which occur over a three to
four month period. Because of the length of its production and sales cycles, the
Company generally strives to complete the design process and place orders for
product samples at least 10 to 15 months prior to delivering product to its
customers. Effective management and timely fulfillment of the Company's
anticipated product development and production schedule is important to each
season's success. Deviations from the schedule can result in delays in product
delivery and in the manufacture of products that do not meet the Company's
normal quality standards and may lead to increased levels of closeout and
liquidation sales, resulting in an adverse effect on the Company's
profitability. These deviations have occurred from time to time in the past, and
there can be no assurance that they will not occur in the future.
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The design staff is responsible for generating an innovative group of
products for the Company's two seasonal collections. During the design process
the Company's manufacturing sources develop new seasonal textiles in association
with the design team. This enables the Company to source a wide variety of
textile and printed artwork designs, many of which the Company acquires for its
exclusive use. The Company's working relationships with its key suppliers have
enhanced its ability to develop distinctive and innovative apparel.
The Company makes a final determination concerning pricing and the
composition of the seasonal lines upon receipt of samples, then uses the samples
to market the new season's products to Company customers. The Company then
places production orders, taking into account market feedback to adjust order
quantities for deliveries later in the season. To enhance consistency, quality
and on-time delivery of its products, the Company works with a select group of
high-quality, reliable foreign and domestic manufacturers who are knowledgeable
and experienced in the intricate design and manufacturing processes required to
produce the Company's products. The Company also continually investigates
additional production sources to add to this select group of manufacturers.
Using these independent manufacturers allows the Company to maximize production
flexibility while avoiding significant capital expenditures, work-in-process
inventory buildups and the costs of managing a large production work force.
Currently, the Company's production is sourced through factories in Asia, South
America, the Middle East and the United States.
The Company has established an in-house embroidery operation which reduces
costs, shortens delivery time and enhances quality control of its embroidered
products, substantially reducing the Company's reliance on independent
embroiderers. The Company currently contracts with approximately six independent
domestic embroiderers during peak embroidery production and shipping periods.
The Company's in-house embroidery manufacturing operation handled approximately
70% of the embroidered logo requirements of its golf pro shop and corporate
customers in fiscal 1998.
The Company does not have formal long-term contracts with any of its
suppliers or agents. Although to date the Company has experienced only limited
difficulty in satisfying its production requirements using this outsourcing
strategy, the loss of any of the Company's suppliers or agents could have a
significant adverse effect on the Company's immediate operating results.
Approximately 45% of the Company's knit shirt production is currently managed by
its agent in Thailand. The Company has on occasion experienced significant
production delays attributable to its suppliers, and there can be no assurance
that such delays will not occur in the future.
The Company's production department oversees its sourcing arrangements. The
production department is responsible for maintaining quality production
standards, on-time delivery of the Company's products and negotiating costs
consistent with the Company's desired profit margins on each style. Department
personnel inspect and critique prototypes of each item prior to the commencement
of actual production in order to maintain the Company's high-quality standards.
Where feasible, the production department obtains a commitment from the sourcing
manufacturer to dedicate a production line to manufacture the Company's products
from season to season. Production department personnel travel to factories to
conduct inspections of the manufacturer prior to shipment of finished product.
They also monitor tariff and quota-related developments, where appropriate.
INFORMATION SYSTEM, INVENTORY MANAGEMENT AND WAREHOUSING
In addition to a computer-aided design system used by the product
development team, the Company has a fully integrated, real-time management
information system that is specifically designed for the apparel industry. The
system includes important features such as manufacturing resource requirements
planning, production scheduling, detailed product tracking, standard costs
system planning and control, and detailed perpetual inventory systems. As
original purchases are tracked through various factory production phases by the
Company's production personnel, sales are tracked by the Vice President of
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Merchandise and Design in order to compare purchases against availability,
thereby allowing the Company to react quickly to changes and trends. In fiscal
1998, the Company initiated a remote-order entry system for the Company's sales
force, on which they can daily monitor and reserve inventory of every style.
Customer service personnel receive this information daily and have access to
real-time inventory availability.
This comprehensive information system serves users in every operating area
of the Company, and is also accessed by personal computers to create costing
models, specification sheets and embroidery layout sheets. The manufacturing
module integrates with the general ledger accounting and financial module. The
Company's information system also provides detailed product gross margin
information that assists the Company in managing product profitability. The
system runs on a UNIX platform with IBM's RISC 6000 hardware, which allows for
the fast processing of critical information, and has the capability of serving a
much greater number of users as the Company grows. The Company hired a Chief
Information Officer in July 1998 to oversee these various systems issues.
ORDER BOOKING CYCLE AND BACKLOG
The Company receives its orders for a season over a ten-month period
beginning when samples are first shown to customers and continuing into the
season. The Company begins to take orders for its fall collections in January,
generally for delivery between May and October, and for its spring collections
in July, generally for delivery between November and April. The Company's
domestic backlog, which consists of open, unfilled customer orders from the golf
and specialty store distribution channels, was $21.3 million as of April 30,
1998. For various reasons endemic to the apparel industry, including occasional
sold out inventory positions, credit issues, and other customer-related issues,
the Company typically does not expect to ship all of its backlog.
COMPETITION
The sportswear segment of the apparel industry is highly competitive. The
Company encounters substantial competition in its primary distribution channel,
golf pro shops, from Ashworth, Izod Club and Polo/Ralph Lauren. The Company
expects to encounter significant competition in connection with its recently
introduced women's apparel line. The golf distribution channel is highly
fragmented, with no single brand representing more than 10% of the market. The
corporate sales distribution channel has been and is becoming more competitive,
and the Company encounters substantial competition from Gear for Sport, other
similar apparel companies and distributors of promotional products and apparel.
Most of the Company's competitors are significantly larger and more diversified
than the Company and have substantially greater resources available for
developing and marketing their products. Some of the Company's competitors
primarily target either a younger or older consumer than the Company. To
maintain its growth rate, the Company will need to increase its market share at
the expense of existing competitors and other established apparel manufacturers
choosing to enter the market. There can be no assurance, however, that the
Company will be successful in increasing its market share.
Management believes that the Company's ability to compete effectively is not
based primarily on price, but on product differentiation, product quality and
production flexibility. The Company's products are also differentiated from a
number of others in the industry by their updated traditional American
appearance and imaginative use of color and trims. In addition, the Company
believes that its products are of a higher quality than those of many of its
competitors.
TRADEMARKS
"CUTTER & BUCK" and the Cutter & Buck pennant logo are trademarks of the
Company and are registered for use on apparel and other products in over 30
countries. The Company also has applied for registration in a number of other
countries. The Company's name and logo are regarded as valuable assets
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and critical to marketing its products. Leading brands in the apparel industry
have historically been subject to competition from imitators that infringe on
the trademarks and trade dress of the brand. While to date the Company has not
suffered to any material extent from infringement of its trademarks or trade
dress, the Company has experienced some instances of such infringement and has
taken actions to vigorously protect its rights.
EMPLOYEES
As of April 30, 1998, the Company had 246 full-time employees and 19
part-time employees, of which 41 were primarily engaged in administration, 54 in
sales, 149 in warehousing and embroidery, 9 in production, 10 in design and 2 in
the operation of the Company's retail store. None of the Company's employees is
a member of a union. The Company considers its relations with its employees to
be excellent.
ITEM 2. PROPERTIES
The Company leases its principal executive offices, which are located in
Seattle, Washington, under a lease that covers 20,558 square feet and expires in
October 2001. The Company also leases for its warehousing and embroidery
operation in Seattle, Washington approximately 58,920 square feet of space under
a lease that expires in April 2001 and an additional 15,000 square feet under a
lease that expires February 1999. The Company's lease of its retail store space
in Lake Oswego, Oregon, a suburb of Portland, covers 2,925 square feet and
expires in September 1999. The Company leases additional office space and uses
contract warehouse facilities for its European distribution. The Company leases
approximately 923 square feet of space for a showroom in Dallas, Texas, under a
lease that expires May 2000 as well as approximately 2,963 square feet of space
for a showroom in New York, New York under a lease that expires April 2003. The
Company also leases a small apartment in New York, New York.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this Item is incorporated herein by reference to
the information contained in the "Shareholders' Information" section of the
Company's 1998 Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated herein by reference to
the information contained in the "Selected Financial Data" section of the
Company's 1998 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is incorporated herein by reference to
the information contained in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section of the Company's 1998
Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by reference to
the information contained in the "Financial Statements" section of the Company's
1998 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference to
the information contained in the "Executive Officers of the Company" and
"Election of Directors" sections of the Company's Proxy Statement to be filed
with the Securities and Exchange Commission within 120 days after the close of
the Company's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to
the information contained in the "Executive Compensation" section of the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days after the close of the Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to
the information contained in the "Security Ownership of Certain Beneficial
Owners and Management" section of the Company's Proxy Statement to be filed with
the Securities and Exchange Commission within 120 days after the close of the
Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to
the information contained in the "Certain Relationships and Related
Transactions" section of the Company's Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days after the close of the
Company's fiscal year.
11
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The Company's Annual Report to Shareholders for the year ended April 30,
1998 and the 1998 definitive proxy materials, which will be filed supplementally
to this report, are not being filed as part of this report.
A. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES:
1. Financial Statements (the financial statements listed below are
incorporated herein by reference to the Company's 1998 Annual Report to
Shareholders):
Independent Auditors' Report
Balance Sheets as of April 30, 1998 and 1997
Statements of Income for the years ended April 30, 1998, 1997 and 1996
Statements of Stockholders' Equity for the years ended April 30, 1998,
1997 and 1996
Statements of Cash Flows for the years ended April 30, 1998, 1997 and
1996
Notes to Financial Statements
2. Financial Statement Schedules--see index on page 15 of this Report.
The independent auditor's report with respect to the financial statement
schedules appears in Exhibit 13.1 of this Report. All other financial
statements and schedules not listed are omitted because either they are not
applicable or not required, or the required information is included in the
consolidated financial statements.
3. Exhibits:
Exhibits required by Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
3.1 Restated Articles of Incorporation (3.1)(1)
3.2 Bylaws (incorporated by reference to Exhibit 3.2 of the Registrant's Form 10-K for the year ended
April 30, 1997)
4.1 Specimen Common Stock Certificate (4.1)(1)
10.3 Lease dated May 22, 1994 between First and Cedar Associates and Jones/Rodolfo Corporation d/b/a
Cutter & Buck(10.3)(1)
10.4 Indenture of Lease dated August 10, 1993 between Lakeplace Associates and Jones/ Rodolfo
Corporation(10.4)(1)
10.5 Factoring Agreement dated March 1, 1995 between Republic Factors Corp. and Jones/ Rodolfo
Corporation(10.5)(1)
10.6 Form of Registration Rights Agreement between Cutter & Buck Inc. and Roanoke Investors' Limited
Partnership, Needham Capital SBIC, L.P. and Needham Emerging Growth Partners, L.P.(10.6)(1)
10.9 1991 Stock Option Plan(10.9)(1)
10.10 1995 Nonemployee Director Stock Incentive Plan(10.10)(1)
10.11 1995 Employee Stock Option Plan(10.11)(1)
10.12 1995 Employee Stock Purchase Plan incorporated by reference to the Registrant's Registration
Statement on Form S-8 (File No. 33-80783)
10.13 Form of Representatives' Warrant(10.13)(1)
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
10.14 Loan Agreement dated February 20, 1997 between Cutter & Buck, Inc. and Washington Mutual Bank d/b/a
Enterprise Bank, and supporting documents (incorporated by reference to Exhibit 10.15 of the
registrant's Form 10-Q for the quarter ended January 31, 1997)
<S> <C>
10.15 1997 Stock Incentive Plan incorporated by reference to the Registrant's Registration Statement on
Form S-8 (File No. 333-43145)
13.1 Annual Report to Shareholders, filed herewith
23.1 Consent of Ernst & Young LLP, Independent Auditors, filed herewith
</TABLE>
- ------------------------
(1) Incorporated by reference to the exhibit shown in the preceding parentheses
and filed with the Registrant's Registration Statement on Form SB-2 (File
No. 33-94540-LA)
B. REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the fourth quarter ended
April 30, 1998.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
CUTTER & BUCK INC.
(Registrant)
July 28, 1998 By /s/ HARVEY N. JONES
------------------------------------------
Harvey N. Jones,
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ---------------------------------------- ---------------
<C> <S> <C>
/s/ HARVEY N. JONES
------------------------------------------- Chairman and Chief Executive Officer and
Harvey N. Jones Director (Principal Executive Officer) July 28, 1998
/s/ MARTIN J. MARKS
------------------------------------------- President, Chief Operating Officer,
Martin J. Marks Treasurer, Secretary and Director July 28, 1998
/s/ STEPHEN S. LOWBER Vice President--Chief Financial Officer
------------------------------------------- (Principal Financial and Accounting
Stephen S. Lowber Officer) July 28, 1998
/s/ MICHAEL S. BROWNFIELD
------------------------------------------- Director
Michael S. Brownfield July 28, 1998
/s/ FRANCES M. CONLEY
------------------------------------------- Director
Frances M. Conley July 28, 1998
/s/ LARRY C. MOUNGER
------------------------------------------- Director
Larry C. Mounger July 28, 1998
/s/ JAMES C. TOWNE
------------------------------------------- Director
James C. Towne July 28, 1998
</TABLE>
14
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
SCHEDULE PAGE
- ------------- -----------
<S> <C> <C>
Schedule II Valuation and Qualifying Accounts 16
</TABLE>
15
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
CUTTER & BUCK INC.
<TABLE>
<CAPTION>
COL. C
-------------------------------
COL. B ADDITIONS COL. E
---------- ------------------------------- COL. D -----------
COL. A BALANCE AT CHARGED TO CHARGED TO ---------- BALANCE AT
- ---------------------------------------- BEGINNING REVENUE, COSTS OTHER ACCOUNTS DEDUCTIONS END OF
DESCRIPTION OF PERIOD OR EXPENSES --DESCRIBE --DESCRIBE PERIOD
- ---------------------------------------- ---------- -------------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Year Ended April 30, 1998
Reserves and allowances deducted from
asset accounts:
Allowance for doubtful accounts
reserve for sales returns and
allowances........................ $ 428,561 $760,915 -- $ 1,661(A) $1,187,815
Reserve for inventory
obsolescence...................... $ 97,785 $401,668 -- -- $ 499,453
Year Ended April 30, 1997
Reserves and allowances deducted from
asset accounts:
Allowance for doubtful accounts
reserve for sales returns and
allowances........................ $ 472,402 -- -- $ 43,841(A) $ 428,561
Reserve for inventory
obsolescence...................... $ 201,521 -- -- $103,736(B) $ 97,785
Year Ended April 30, 1996
Reserves and allowances deducted from
asset accounts:
Allowance for doubtful accounts
reserve for sales returns and
allowances........................ $ 292,005 $223,432 -- $ 43,035(A) $ 472,402
Reserve for inventory
obsolescence...................... $ 129,316 $ 72,205 -- $ -- $ 201,521
</TABLE>
- ------------------------
(A) Deductions consist of write-offs of uncollectable accounts, net of
recoveries.
(B) Deductions consist of inventory sold.
16
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED
NOTES THERETO INCLUDED ELSEWHERE IN THIS ANNUAL REPORT. IN ADDITION TO THE
HISTORICAL INFORMATION CONTAINED HEREIN, THIS DISCUSSION AND ANALYSIS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, STYLE CHANGES AND PRODUCT
ACCEPTANCE, INCLUDING THE CONTINUED ACCEPTANCE OF CASUAL DRESS IN THE OFFICE
ENVIRONMENT, PRODUCT OR DELIVERY DELAYS, RELATIONS WITH SUPPLIERS AND
INDEPENDENT SALES REPRESENTATIVES, THE ABILITY OF THE COMPANY TO CONTROL COSTS
AND EXPENSES AND TO EFFECTIVELY MANAGE ITS CREDIT AND COLLECTION OPERATIONS,
SHORTAGES OF RAW MATERIALS SUCH AS COTTON, THE ABILITY TO PENETRATE ITS CHOSEN
DISTRIBUTION CHANNELS, THE POSITIONING OF THE COMPANY IN ITS CHOSEN MARKET, THE
IMPACT OF COMPETITIVE SELECTION AND TO A LESSER EXTENT PRICING, AND THE EFFECT
OF INTEREST RATES, TRADE RELATIONS AND GENERAL ECONOMIC CONDITIONS. ALL
REFERENCES TO FISCAL YEARS ARE REFERENCES TO THE COMPANY'S FISCAL YEAR ENDING
APRIL 30.
OVERVIEW
The Company markets its Cutter & Buck brand sportswear and outerwear
primarily through golf pro shops and resorts, better specialty stores and
corporate sales accounts. The Company's sales to golf pro shops have increased
in the last three fiscal years to $36.4 million, representing approximately 52%
of the Company's net sales in fiscal 1998. Sales to corporate accounts also
increased to $17.2 million, or approximately 25% of net sales in fiscal 1998.
Sales to specialty stores, the dominant channel of distribution for the
Company's products during its first few years, amounted to $9.3 million in
fiscal 1998, representing approximately 13% of net sales for the fiscal year.
The Company's sales to other distribution channels were approximately 10% of net
sales in fiscal 1998.
The Company's $8.8 million increase in net sales to the golf distribution
channel in fiscal 1998 represented approximately 37% of the Company's total
increase in net sales for that year. This growth in net sales to the golf
distribution channel is primarily attributable to (i) an increase in the number
of golf pro shops purchasing the Company's products (approximately 3,000 golf
pro shops in fiscal 1998 compared to 2,400 golf pro shops in fiscal 1997), and
(ii) an increase in the average annual net sales per golf pro shop. The Company
believes that the golf distribution channel is comprised of approximately
14,000 U.S. golf pro shops. The increase in the number of the Company's golf
pro shop customers is due to the growth in the size of its golf pro shop sales
force and to the increasing proportion of these sales representatives
exclusively selling Cutter & Buck products. The increase in average annual net
sales per customer for fiscal 1998 compared to fiscal 1997 is the result of the
Company offering more product styles and increasing the average annual net sales
per style. The Company believes these increased purchasing levels by its
customers reflect the establishment of cooperative working relationships between
the Company and golf pro shops, particularly in the area of merchandising the
Company's coordinated themes and collections, as well as consumer acceptance of,
and increasing demand for, the Company's products. The Company plans to
increase the size and effectiveness of its sales force and further augment its
product offerings.
As the Company's sales volume has increased, the Company has continued to
make investments in its management and systems infrastructure, negotiated
improved cost arrangements with its suppliers, and reduced in-house embroidery
costs through economies of scale. While these actions have resulted in an
increase in operating expenses as a percentage of sales for the most recent
fiscal year, the Company continues to experience improvements in gross margins,
operating income and working capital management.
The Company introduced a women's line of apparel for the summer 1998
season. The Company plans to sell its women's line through its existing
channels of distribution. While the Company is hopeful that the introduction of
this line will augment its earnings in fiscal 1999, there can be no assurance
that it will prove successful or will have a material effect on the Company's
financial performance in fiscal 1999 or thereafter.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the fiscal years indicated certain statements
of operations data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
-----------------------------------
1996 1997 1998
-----------------------------------
<S> <C> <C> <C>
Statements of Operations Data:
Net sales 100.0% 100.0% 100.0%
Cost of sales 63.1 60.2 58.0
---- ---- ----
Gross profit 36.9 39.8 42.0
Operating expenses:
Design and production 4.8 2.7 3.0
Selling and handling 17.8 18.8 18.7
General and administrative 9.5 7.6 8.2
--- --- ---
Total operating expenses 32.1 29.1 29.9
---- ---- ----
Operating income 4.8 10.7 12.1
Other income (expense):
Factor commission and interest
expense, net of interest income (1.1) (0.4) (0.2)
License and royalty income, net of
other expense 2.1 0.9 0.3
--- --- ---
Total other income 1.0 0.5 0.1
--- --- ---
Income before income taxes 5.8 11.2 12.2
Income taxes 1.2 3.5 4.1
---- ---- ----
Net income 4.6% 7.7% 8.1%
---- ---- ----
---- ---- ----
</TABLE>
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
NET SALES
During fiscal 1998 and fiscal 1997, net sales increased from the prior year
period by 50.5% and 115.3%, respectively. The expansion of the Company's sales
to the golf distribution channel had a significant impact on its sales growth.
Net sales to this channel increased $8.8 million, or approximately 32%, to
$36.4 million in fiscal 1998, increased $16.3 million, or approximately 143%, to
$27.7 million in fiscal 1997, and increased $5.7 million, or approximately 100%,
to $11.4 million in fiscal 1996. Net sales in the golf distribution channel
through the Company's European subsidiaries included in these figures increased
to $4.6 million in fiscal 1998 from $2.8 million in fiscal 1997. Net sales to
the corporate sales channel increased $8.0 million, or approximately 88%, to
$17.2 million in fiscal 1998, and increased approximately 210% to $9.2 million
in fiscal 1997 from $3.0 million in fiscal 1996. Sales to better specialty
stores increased 65.1% in fiscal 1998 when compared to fiscal 1997 and increased
19.1% in fiscal 1997 compared to fiscal 1996. Specialty store sales increased
to approximately 13% of total Company sales in fiscal 1998 from 12% in fiscal
1997, as compared to 21% in fiscal 1996. The Company's sales of seasonal
remainder merchandise to off-price retailers was approximately 4% of net sales
in fiscal 1998 and fiscal 1997, compared to approximately 3% of net sales in
fiscal 1996. The Company's sales to other distribution channels were less than
10% of net sales in each of fiscal years 1998, 1997 and 1996. The Company
anticipates continued sales growth in each of its three primary distribution
channels in fiscal 1999, with the corporate sales channel expected to achieve
the largest percentage increase.
GROSS PROFIT MARGIN
In fiscal 1998, the Company's gross profit margin was 42.0% of net sales,
compared to 39.8% in fiscal 1997 and 36.9% in fiscal 1996. The increase during
fiscal 1998 was primarily due to economies of scale. Higher production volumes
have given the Company increased negotiating leverage to purchase product at
lower unit costs and the ability to expand its international sourcing. Gross
profit margin improvement in fiscal
<PAGE>
1998 also reflected cost of sales reductions due to the utilization of an
in-house embroidery operation, which has decreased unit costs of embroidery
production. Additional improvement in gross profit margin can be attributed
to reduced expediting costs resulting from more effective production
scheduling. The gross profit margin increase in fiscal 1997 was also
primarily due to economies of scale, improved product sourcing and letter of
credit financing.
During fiscal 1997, the Company established an in-house embroidery
manufacturing operation. This facility has enabled the Company to handle
directly an increasing percentage of the embroidered logo requirements of its
golf, resort and corporate customers. The Company expects to produce directly
approximately 80% of its embroidered sales in fiscal 1999 versus 70% in fiscal
1998 and approximately 50% in fiscal 1997.
DESIGN AND PRODUCTION EXPENSES
Design and production expenses increased by $864,000, or 68.7%, to $2.1
million in fiscal 1998 from $1.3 million in fiscal 1997 and increased as a
percentage of net sales to 3.0% in 1998 from 2.7% in 1997, but decreased when
compared to 4.8% in 1996. The dollar increase in these expenses is primarily
attributable to increased management and staffing costs associated with
expansion of the Company's product line and increased embroidery design costs
for the golf distribution and corporate channels. The increase in design and
production costs as a percentage of sales in fiscal 1998 compared to fiscal 1997
is primarily attributable to an increased investment in management, staffing and
systems to support the addition of the Company's women's line as well as
increased expenses associated with the Company's efforts to further diversify
its production sourcing.
SELLING AND HANDLING EXPENSES
Selling and handling expenses increased by $4.4 million, or 49.6%, to $13.1
million in fiscal 1998 from $8.8 million in fiscal 1997, representing 18.7% of
net sales in fiscal 1998 and 18.8% in fiscal 1997. The dollar amount increase
was primarily attributable to increased salaries and commissions, management and
marketing expenses, and additional direct overhead costs of the Company's
warehouse operation associated with the Company's increased sales volumes and
higher levels of inventory.
The Company increased the size of its sales force for the corporate channel
to 29 sales representatives at the end of fiscal 1998 from 19 at the end of
fiscal 1997 and nine at the end of fiscal 1996. The Company also strengthened
its domestic golf sales force by increasing the percentage of employee
representatives selling Cutter & Buck products exclusively as opposed to
independent, multi-line sales representatives. In fiscal 1998, the Company
increased the percentage of exclusive representatives within its golf sales
force to 73% from 63% in fiscal 1997. The number of sales representatives in
the golf channel increased from 32 at the end of fiscal 1997 to 33 at the end of
fiscal 1998. At the beginning of fiscal 1998, the Company reorganized its sales
force for the specialty store channel. As of the end of fiscal 1998, the
Company had three regional sales representatives working in this channel and one
sales representative exclusively dedicated to the big and tall market, all under
the direction of a National Sales Manager for the specialty store channel.
Selling and handling expense increased by $4.9 million, or 127.4%, to
$8.8 million in fiscal 1997 from $3.9 million in fiscal 1996. In fiscal 1996,
these expenses represented 17.8% of net sales. The $4.9 million increase
primarily resulted from increased commissions and, to a lesser extent, from
management and marketing expenses. The Company expanded the size of its golf
sales force to 32 sales representatives at the end of fiscal 1997 from 26 at the
end of fiscal 1996.
During fiscal 1998, the Company purchased and installed $1.2 million of
in-store fixturing to enhance collection merchandising in 218 of its customers'
locations, reaching a total of 680 golf pro shops and specialty stores by the
end of fiscal 1998. In fiscal 1997 and fiscal 1996, the Company purchased and
installed $997,000 and $284,000, respectively, of in-store fixturing. The
Company expects to purchase an additional $2.0 million of fixtures in fiscal
1999 to be targeted to an additional 180 locations, reaching a total of 860 golf
pro shops and specialty stores by the end of fiscal 1999. Customer eligibility
for the fixturing program is conditioned on minimum order commitments for
Cutter & Buck products. The investment in these fixtures is being amortized as
a marketing expense over a three year period. This program represents an
intentional increase in the Company's level of marketing expense as a component
of selling and handling expenses and, to the extent it remains successful, is
expected to continue at comparable levels in future years.
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by $2.2 million, or 62.6%, to
$5.7 million in fiscal 1998 from $3.5 million in fiscal 1997, and increased as a
percentage of net sales to 8.2% in fiscal 1998 from 7.5% in fiscal 1997.
General and administrative expenses were $2.0 million in fiscal 1996, or 9.5% of
net sales. The dollar amount increase during fiscal 1998 was primarily due to
increased management, staffing and facilities in support of the Company's
growth. The increased general and administrative expenses in fiscal 1998 also
reflected increased investment in systems, administrative and professional fees
required by expanded operations and expected future growth, together with an
increased provision for bad debt expense to strengthen the Company's accounts
receivable reserve position. These additional investments and costs resulted in
a moderate increase in general and administrative expenses as a percentage of
net sales for fiscal 1998 to 8.2% from 7.5% in fiscal 1997. The dollar amount
increase in fiscal 1997 was primarily due to increased management, staffing and
facilities to support the Company's expanded operations, along with additional
insurance expense and professional fees related to the Company's public
reporting. Commencing in fiscal 1997, general and administrative expenses
included the cost of an expanded credit and collections function which replaced
a significant portion of factor commission expense incurred in prior years.
FACTOR COMMISSION AND INTEREST EXPENSE, NET OF INTEREST INCOME
Factor commissions and net interest expense decreased by $62,000, or 31.7%,
to $135,000 in fiscal 1998 from $197,000 in fiscal 1997 and $237,000 in fiscal
1996, representing 0.2%, 0.4% and 1.1% of net sales in fiscal 1998, fiscal 1997
and fiscal 1996, respectively. The reduction in the dollar amount is primarily
due to interest earned on the Company's cash deposits and limiting factoring
services in the United States to the specialty store channel.
LICENSE AND ROYALTY INCOME, NET OF OTHER EXPENSE
License and royalty income, net of other expense decreased by $197,000, or
48.2%, to $212,000, representing 0.3% of net sales in fiscal 1998, from $409,000
and 0.9% of net sales in fiscal 1997. The reduction in license and royalty
income reflects the Company's shift towards direct international sales and
exclusive distributor relationships and away from licensing relationships. This
category also includes gains and losses from foreign currency transactions
resulting in a net exchange loss of $75,000 in fiscal 1998. This decline in
license and royalty income in fiscal 1998 was primarily attributable to the
Company's decision to directly market big and tall merchandise and terminate its
license for this category effective June 1997. In fiscal 1997, license and
royalty income decreased by $48,000, or 10.7%, to $409,000 from $457,000 and
2.1% of net sales in fiscal 1996. This decline in license and royalty income
was primarily due to the Company's decision to repurchase its outerwear license
effective May 1996.
INCOME TAXES
The Company recorded $2.9 million of income tax expense in fiscal 1998,
$1.6 million in fiscal 1997 and $260,000 in fiscal 1996. Tax expenses for
fiscal 1998 are at the statutory rates of 34% and are expected to approximate
36% in fiscal 1999. In fiscal 1997 and fiscal 1996, tax expenses were lower
than the statutory rates primarily due to the utilization of net operating loss
carryforwards, the benefit of which had been previously reserved. As of
April 30, 1998, there are no remaining net operating loss carryforwards
available to offset future taxable income.
<PAGE>
Quarterly Results and Seasonality
Historically, the Company has generally experienced its lowest level of net
sales in its first and third quarters, ending July 31 and January 31,
respectively. Correspondingly, the Company's highest level of sales are
achieved in its second and fourth quarters, ending October 31 and April 30,
respectively. This seasonality has resulted primarily from the timing of
shipments to golf pro shops and better specialty stores in the second and fourth
quarters. Other factors contributing to the variability of the Company's
quarterly results include seasonal fluctuations in consumer demand, the timing
and amount of orders from key customers, the timing and magnitude of sales of
seasonal remainder merchandise and availability of product. This pattern of
sales creates seasonal profitability, working capital financing and liquidity
issues, as the Company generally must finance higher levels of inventory during
the first and third quarters when sales are lowest. Regardless of seasonal
fluctuations, there can be no assurance that the Company will be profitable in
any particular quarter.
<PAGE>
The following tables set forth certain operating data of the Company,
including percentages of net sales, for the eight quarters ending April 30,
1998.
<TABLE>
<CAPTION>
FISCAL 1997 QUARTER ENDED
----------------------------------------------------
July 31, October 31, January 31, April 30,
----------- ----------- ------------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Net sales $ 8,000 $ 12,290 $ 8,452 $ 17,851
Cost of sales 5,020 7,494 4,963 10,577
----------- ----------- ----------- -----------
Gross profit 2,980 4,796 3,489 7,274
Operating expenses:
Design and production 336 365 362 193
Selling and handling 1,712 2,221 1,903 2,938
General and administrative 714 913 876 1,010
----------- ----------- ----------- -----------
Total operating expenses 2,762 3,499 3,141 4,141
----------- ----------- ----------- -----------
Operating income 218 1,297 348 3,133
Other income (expense):
Factor commission and interest expense, net of
interest income (111) (119) 40 (7)
License and royalty income, net of other expense 96 61 92 160
----------- ----------- ----------- -----------
Total other income (expense) (15) (58) 132 153
----------- ----------- ----------- -----------
Income before income taxes 203 1,239 480 3,286
Income taxes 61 374 156 1,019
----------- ----------- ----------- -----------
Net income $ 142 $ 865 $ 324 $ 2,267
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<CAPTION>
FISCAL 1998 QUARTER ENDED
---------------------------------------------------
July 31, October 31, January 31, April 30,
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 12,378 $ 17,349 $ 14,151 $ 26,226
Cost of sales 7,418 10,204 8,199 14,821
----------- ----------- ----------- -----------
Gross profit 4,960 7,145 5,952 11,405
Operating expenses:
Design and production 418 605 583 514
Selling and handling 2,685 3,196 2,945 4,303
General and administrative 1,139 1,558 1,435 1,578
----------- ----------- ----------- -----------
Total operating expenses 4,242 5,359 4,963 6,395
----------- ----------- ----------- -----------
Operating income 718 1,786 989 5,010
Other income (expense):
Factor commission and interest expense, net of
interest income (11) (41) (42) (41)
License and royalty income, net of other expense 13 15 76 108
----------- ----------- ----------- -----------
Total other income (expense) 2 (26) 34 67
----------- ----------- ----------- -----------
Income before income taxes 720 1,760 1,023 5,077
Income taxes 245 600 350 1,725
----------- ----------- ----------- -----------
Net income $ 475 $ 1,160 $ 673 $ 3,352
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<CAPTION>
FISCAL 1997 QUARTER ENDED
----------------------------------------------------
July 31, October 31, January 31, April 30,
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
As a Percentage of Net sales:
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 62.8 61.0 58.7 59.3
------ ------ ------ ------
Gross profit 37.2 39.0 41.3 40.7
Operating expenses:
Design and production 4.2 3.0 4.3 1.1
Selling and handling 21.4 18.1 22.5 16.4
General and administrative 8.9 7.4 10.4 5.7
------ ------ ------ ------
Total operating expenses 34.5 28.5 37.2 23.2
------ ------ ------ ------
Operating income 2.7 10.5 4.1 17.5
Other income (expense):
Factor commission and interest expense, net of
interest income (1.4) (1.0) 0.5 (0.0)
License and royalty income, net of other expense 1.2 0.5 1.1 0.9
------ ------ ------ ------
Total other income (expense) (0.2) (0.5) 1.6 0.9
------ ------ ------ ------
Income before income taxes 2.5 10.0 5.7 18.4
Income taxes 0.8 3.0 1.9 5.7
----------- ----------- ------ -----------
Net income 1.7% 7.0% 3.8% 12.7%
----------- ----------- ------ -----------
----------- ----------- ------ -----------
<CAPTION>
FISCAL 1998 QUARTER ENDED
------------------------------------------------
July 31, October 31, January 31, April 30,
<S> ----------- ----------- ----------- -----------
As a Percentage of Net sales: <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 59.9 58.8 57.9 56.5
------ ------ ------ ------
Gross profit 40.1 41.2 42.1 43.5
Operating expenses:
Design and production 3.4 3.5 4.1 2.0
Selling and handling 21.7 18.4 20.8 16.4
General and administrative 9.2 9.0 10.2 6.0
------ ------ ------ ------
Total operating expenses 34.3 30.9 35.1 24.4
------ ------ ------ ------
Operating income 5.8 10.3 7.0 19.1
Other income (expense):
Factor commission and interest expense, net of
interest income (0.1) (0.2) (0.3) (0.1)
License and royalty income, net of other expense 0.1 0.1 0.5 0.4
------ ------ ------ ------
Total other income (expense) 0.0 (0.1) 0.2 0.3
------ ------ ------ ------
Income before income taxes 5.8 10.2 7.2 19.4
------ ------ ------ ------
Income taxes 2.0 3.5 2.4 6.6
------ ------ ------ ------
Net Income 3.8% 6.7% 4.8% 12.8%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary need for funds is to finance working capital and
to fund increased investment in its in-store fixturing program and other
capital expenditures. The Company's increased working capital requirements
during the three years ended April 30, 1998 related to increasing accounts
receivable and finished goods inventory levels associated with growth in
sales volume. To date, working capital has been funded primarily by
profitable operations and by a combination of increased accounts payable,
accounts receivable financing through a factor, bank borrowing, the private
sale of Preferred Stock and the public sale of Common Stock.
Net cash provided by operating activities in fiscal 1998 was $1.7 million.
This resulted primarily from profitable operations and increases in accounts
payable and accrued liabilities and income taxes payable totaling $2.1 million,
which were partially offset by increases in inventory and accounts receivable of
$758,000 and $6.0 million, respectively. The Company expects growth in
inventory during fiscal 1999 to correspond more closely to sales growth than was
the case in fiscal 1998, and that the rate of inventory turnover in fiscal 1999
will not increase relative to fiscal 1998.
In fiscal 1998, net cash provided by financing activities was $1.3 million,
resulting primarily from the issuance of Common Stock pursuant to the exercise
of outstanding options and purchases pursuant to the Company's Employee Stock
Purchase Plan and borrowings from the Company's European bank.
Net cash used in investing activities was $2.8 million in fiscal 1998 and
was substantially the result of an increased investment in furniture and
equipment of $2.7 million.
The Company incurred capital expenditures and lease purchases of $3.1
million, $2.5 million and $655,000 in fiscal years 1998, 1997 and 1996,
respectively. In fiscal 1998, expenditures for capital assets included $1.2
million for in-store fixtures, $488,000 for warehouse and embroidery equipment,
$738,000 for upgrades to computer hardware and software, $393,000 for leasehold
improvements and a total of $281,000 for other furniture and equipment. In
fiscal 1997, expenditures for capital assets included $997,000 for in-store
fixtures, $917,000 for warehouse and embroidery equipment and a total of
$586,000 for other furniture and equipment. In fiscal 1996, expenditures for
capital assets included $284,000 for in-store fixtures, $116,000 for
construction of a new trade show booth and other furniture and equipment
purchases totaling $255,000. Capital expenditures of $5.0 million are planned
for fiscal 1999, including $2.0 million for in-store fixtures, $1.0 million for
warehouse and embroidery equipment, $700,000 for upgrades to computer hardware
and software, $700,000 for leasehold improvements and a total of $600,000 for
other furniture and equipment.
The Company is a party to a loan agreement with Washington Mutual Bank
d/b/a Western Bank ("Western Bank") for a $20.0 million line of credit. The
Western Bank line of credit is to be used for international letters of credit,
working capital advances and other corporate purposes. Interest on borrowings
is charged and payable monthly at Western Bank's prime rate. The line of credit
is collateralized by a security interest in the Company's inventory, accounts
receivable, contract rights and general intangibles. The loan agreement
contains certain restrictive covenants covering minimum working capital and
tangible net worth, as well as a maximum debt to equity ratio. Western Bank and
Republic Business Credit Corporation ("Republic") have entered into an
intercreditor agreement allocating between them priority as to the Company's
assets in which both financial institutions have a security interest.
Pursuant to an agreement (the "Factoring Agreement") with Republic,
Republic acts as the Company's sole factor in the United States for its accounts
receivable. The Factoring Agreement provides that the Company can sell its
qualified accounts receivable to Republic and Republic will pay the Company an
amount equal to the gross amount of the Company's accounts receivable from
customers
<PAGE>
reduced by certain offsets, including, among other things, discounts and
returns and a .95% commission payable by the Company to Republic. The
intercreditor agreement between Western Bank and Republic prohibits the
Company from taking advances under the Factoring Agreement. Subject to its
credit review procedures, Republic may decline to accept the credit risk on
certain accounts receivable. The Factoring Agreement continues in force from
year to year and may be terminated by Republic on any anniversary of its
effective date (April 7) or by the Company at any time, provided that in each
case the terminating party gives 60 days prior written notice.
On February 24, 1998, the Company's European subsidiary entered into a
loan agreement with Cooperatieve Rabobank "Huizen" B.A. ("Rabobank") for a
$1.8 million line of credit. The line of credit with Rabobank is to be used
for international letters of credit and working capital advances. Interest
on borrowings is charged and payable quarterly at a variable rate (4.95% at
April 30, 1998). The line of credit is secured by the Company's European
inventory, an irrevocable standby letter of credit issued by Western Bank of
$1.6 million and subordination of $2.2 million of intercompany debt.
Commencing in fiscal 1997, the Company has directly managed the accounts
receivable credit and collection functions associated with its sales to the
golf, corporate and international distribution channels and has used Republic's
accounts receivable management exclusively for its sales to the specialty store
channel. The Company plans to continue to primarily use the Western Bank line
of credit to fund its anticipated working capital needs.
As of June 30, 1998, the Company had working capital of approximately
$34.8 million. The Company's principal source of liquidity in fiscal 1999, in
addition to cash on hand, is expected to be the Western Bank and Rabobank lines
of credit, of which the Company had open letters of credit in the aggregate
amount of $11.6 million and outstanding loans in the amount of $316,000 as of
June 30, 1998.
The Company believes that cash generated from operations and the ability to
borrow under its lines of credit will be sufficient to meet its operating needs
in fiscal 1999. However, the Company's capital needs will depend on many
factors, including the Company's growth rate, the need to finance increased
production and inventory levels, the success of the Company's various sales and
marketing programs and various other factors. Depending upon its growth and
working capital needs, the Company may require additional financing in the
future through debt or equity offerings, which may or may not be available or
may be dilutive. The Company's ability to obtain additional financing will
depend on its operations, financial condition and business prospects, as well as
conditions then prevailing in the relevant capital markets.
CURRENCY FLUCTUATIONS
The Company's wholly owned subsidiary in Europe maintains its books of
account in Netherlands guilders. Sales of Cutter & Buck product are generally
denominated in the currency of the countries throughout the European Union where
the Company's customers are located. Fluctuations in the currency rates between
The Netherlands and those other countries give rise to a loss or gain which is
reported in earnings. In fiscal 1998, the Company reported a loss of $75,000
related to such transactions.
The Company reduces the risks associated with changes in foreign currency
rates by entering into foreign exchange forward contracts to hedge transactions
denominated in foreign currencies for periods of less than one year and to hedge
expected payments for product purchases from non-U.S. manufacturers. Gains and
losses on contracts which hedge specific foreign currency denominated
commitments are recognized in the period in which the transaction is completed.
The table below presents the amount of contracts outstanding, contract
rates and unrealized gains as of April 30, 1998:
<TABLE>
<CAPTION>
Currency U.S. Dollar Amount Contract Rate Unrealized Gain
-------- ------------------ ------------- ---------------
<S> <C> <C> <C>
British Pounds Sterling $217,841 1.6757 $2,444
</TABLE>
<PAGE>
YEAR 2000
The Company recognizes the need to ensure that its systems, applications
and hardware will recognize and process transactions for the year 2000 and
beyond. With the recent hire of a Chief Information Officer, the Company
expects to develop a company-wide plan to identify all issues related to the
impact of year 2000 issues on its internal systems during the first half of
fiscal 1999. The Company plans to implement successfully the systems and
programming changes necessary to address year 2000 issues with respect to its
internal systems and does not believe that the cost of such actions will have a
material adverse effect on its results of operations or financial condition.
The Company has a fully integrated, real-time management information system
that is specifically designed for the apparel industry. The system runs on a
UNIX platform with IBM's RISC 6000 hardware. The Company has had preliminary
discussions with the vendors for the apparel and the IBM RISC 6000 systems, and
has received assurances from the vendors that each system is year 2000
compliant. The Company is developing a complete testing program for both
systems to verify compliance.
The Company is in the process of identifying its significant suppliers,
customers and financial institutions to ensure that those parties have
appropriate plans to remediate year 2000 issues when their systems interface
with the Company's systems or may otherwise impact operations.
Although the Company is not presently aware of any material operational issues
or costs associated with preparing its internal systems for the year 2000, there
can be no assurance that there will not be a delay in, or increased costs
associated with, the implementation of the necessary systems and changes to
address the year 2000 issues. The Company and its significant suppliers,
customers, and financial institutions' inability to implement such systems and
changes could have an adverse effect on future results of operations.
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data as of April 30, 1998 and 1997, and
for each of the three years in the period ended April 30, 1998 are derived from
the consolidated financial statements of Cutter & Buck Inc., which have been
audited by Ernst & Young LLP, Independent Auditors, and are included elsewhere
in this Annual Report. The following selected financial data as of April 30,
1996, 1995 and 1994 and for each of the two years in the period ended April 30,
1995 are derived from the Company's financial statements which were also audited
by Ernst & Young LLP and are not included herein. The data should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto included elsewhere in this Annual Report and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 9,882 $ 13,435 $ 21,645 $ 46,593 $ 70,104
Cost of sales 6,444 8,760 13,664 28,054 40,642
--------- --------- --------- --------- ---------
Gross profit 3,438 4,675 7,981 18,539 29,462
Operating expenses:
Design and production 510 747 1,045 1,256 2,120
Selling and handling 1,781 2,446 3,858 8,774 13,129
General and administrative 1,053 1,364 2,042 3,513 5,710
--------- --------- --------- --------- ---------
Total operating expenses 3,344 4,557 6,945 13,543 20,959
--------- --------- --------- --------- ---------
Operating income 94 118 1,036 4,996 8,503
Other income (expense):
Factor commission and interest expense, net of interest income (278) (376) (237) (197) (135)
License and royalty income, net of other expense 285 497 457 409 212
--------- --------- --------- --------- ---------
Total other income 7 121 220 212 77
--------- --------- --------- --------- ---------
Income before income taxes 101 239 1,256 5,208 8,580
Income taxes -- -- 260 1,610 2,920
--------- --------- --------- --------- ---------
Net income $ 101 $ 239 $ 996 $ 3,598 $ 5,660
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic earnings per share $ 0.06 $ 0.13 $ 0.31 $ 0.82 $ 1.08
Diluted earnings per share $ 0.05 $ 0.12 $ 0.29 $ 0.77 $ 1.02
Shares used in computation of basic earnings per share 1,684 1,780 3,232 4,388 5,234
Shares used in computation of diluted earnings per share 1,993 2,034 3,477 4,669 5,529
<CAPTION>
APRIL 30,
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash $ 327 $ 499 $ 2,010 $ 7,442 $ 7,590
Receivables (1) 981 2,335 7,653 14,419 20,217
Inventories 561 1,890 4,693 12,489 13,248
Working capital 1,058 3,209 12,488 29,811 34,442
Total assets 2,488 5,693 17,170 38,960 48,144
Long-term debt 38 98 -- 523 627
Total shareholders' equity 1,387 3,566 14,023 32,187 38,621
</TABLE>
(1) Includes factored receivables, net of factor advances. See Note 3 of
Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
APRIL 30,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Current assets:
Cash $7,441,717 $7,589,731
Accounts receivable, net of allowances for doubtful accounts, and returns and
allowances of $428,561 in 1997 and $1,187,813 in 1998 14,419,108 20,216,721
Inventories 12,489,410 13,247,892
Deferred income taxes 284,000 782,545
Prepaid expenses and other current assets 1,426,983 1,502,634
----------- -----------
Total current assets 36,061,218 43,339,523
Furniture and equipment, net 2,646,018 4,568,515
Other assets 252,923 236,329
----------- -----------
Total assets $38,960,159 $48,144,367
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $4,481,380 $5,110,405
Accrued liabilities 740,746 1,606,994
Income taxes payable 887,632 1,498,720
Loan payable to bank -- 486,913
Current portion of capital lease obligations 140,545 194,040
---------- ----------
Total current liabilities 6,250,303 8,897,072
Capital lease obligations 522,547 626,682
Commitments
Shareholders' equity:
Preferred stock, no par value:
6,000,000 shares authorized; none issued and
outstanding -- --
Common stock, no par value:
25,000,000 shares authorized; 5,156,397 issued and outstanding
in 1997 and 5,250,796 in 1998 29,750,791 30,577,648
Retained earnings 2,507,935 8,168,003
Currency translation adjustment (71,417) (125,038)
----------- -----------
Total shareholders' equity 32,187,309 38,620,613
----------- -----------
Total liabilities and shareholders' equity $38,960,159 $48,144,367
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------------------
1996 1997 1998
-----------------------------------------
<S> <C> <C> <C>
Net sales $21,645,202 $46,592,758 $70,104,015
Cost of sales 13,664,607 28,053,845 40,642,031
-----------------------------------------
Gross profit 7,980,595 18,538,913 29,461,984
Operating expenses:
Design and production 1,044,692 1,256,247 2,119,831
Selling and shipping 3,858,184 8,773,380 13,128,725
General and administrative 2,042,194 3,512,824 5,710,430
-----------------------------------------
Total operating expenses 6,945,070 13,542,451 20,958,986
-----------------------------------------
Operating income 1,035,525 4,996,462 8,502,998
Other income (expense):
Factor commission and interest
expense, net of interest income
of $134,915 in 1996, $212,968 in
1997 and $359,565 in 1998 (236,962) (196,973) (134,579)
License and royalty income, net of
other expense 457,787 408,728 211,649
-----------------------------------------
Total other income 220,825 211,755 77,070
-----------------------------------------
Income before income taxes 1,256,350 5,208,217 8,580,068
-----------------------------------------
Income taxes 260,000 1,610,600 2,920,000
-----------------------------------------
Net income $ 996,350 $ 3,597,617 $ 5,660,068
-----------------------------------------
-----------------------------------------
Basic earnings per share $ 0.31 $ 0.82 $ 1.08
-----------------------------------------
-----------------------------------------
Diluted earnings per share $ 0.29 $ 0.77 $ 1.02
-----------------------------------------
-----------------------------------------
</TABLE>
See accompanying notes.
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock
----------------------------------------------------
Series A Series B Common Stock
----------------------- ------------------------- -------------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, April 30, 1995 2,932,000 $3,655,988 735,510 $1,939,469 327,819 $100,790
Sale of Series B convertible
preferred stock, net of offering
expenses of $66,288 -- -- 403,618 1,039,625 -- --
Conversion of convertible preferred
stock to common stock (2,932,000) (3,655,988) (1,139,128) (2,979,094) 1,883,021 6,635,082
Sale of common stock, net of
offering expenses of
$1,770,295 -- -- -- -- 1,455,875 8,420,830
Net income -- -- -- -- -- --
---------- ---------- ---------- ---------- --------- -----------
Balance, April 30, 1996 -- $ -- -- $ -- 3,666,715 $15,156,702
---------- ---------- ---------- ---------- --------- -----------
Sale of common stock, net of
offering expenses of
$1,434,356 -- -- -- -- 1,454,307 14,563,021
Stock issued under employee
stock purchase plan -- -- -- -- 2,796 12,549
Exercise of stock options -- -- -- -- 5,812 18,519
Exercise of stock warrants -- -- -- -- 26,767 --
Repayment of note receivable -- -- -- -- -- --
Foreign currency translation -- -- -- -- -- --
Net income -- -- -- -- -- --
---------- ---------- ---------- ---------- --------- -----------
Balance, April 30, 1997 -- $ -- -- $ -- 5,156,397 $29,750,791
---------- ---------- ---------- ---------- --------- -----------
Stock issued under employee
stock purchase plan -- -- -- -- 5,871 68,464
Exercise of stock options -- -- -- -- 88,528 359,908
Tax benefit on exercise of stock options -- -- -- -- -- 398,485
Foreign currency translation -- -- -- -- -- --
Net income -- -- -- -- -- --
---------- ---------- ---------- ---------- --------- -----------
Balance, April 30, 1998 -- $ -- -- $ -- 5,250,796 $30,577,648
---------- ---------- ---------- ---------- --------- -----------
---------- ---------- ---------- ---------- --------- -----------
Note
Receivable Currency
from Retained Translation
Shareholder Earnings Adjustment Total
----------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Balance, April 30, 1995 $(44,520) $(2,086,032) $ -- $3,565,695
Sale of Series B convertible
preferred stock, net of offering
expenses of $66,288 -- -- -- 1,039,625
Conversion of convertible preferred
stock to common stock -- -- -- --
Sale of common stock, net of
offering expenses of
$1,770,295 -- -- -- 8,420,830
Net income -- 996,350 -- 996,350
-------- ----------- -------- -----------
Balance, April 30, 1996 $(44,520) $(1,089,682) $ -- $14,022,500
-------- ----------- -------- -----------
Sale of common stock, net of
offering expenses of
$1,434,356 -- -- -- 14,563,021
Stock issued under employee
stock purchase plan -- -- -- 12,549
Exercise of stock options -- -- -- 18,519
Exercise of stock warrants -- -- -- --
Repayment of note receivable 44,520 -- -- 44,520
Foreign currency translation -- -- (71,417) (71,417)
Net income -- 3,597,617 -- 3,597,617
-------- ----------- -------- -----------
Balance, April 30, 1997 $ -- $2,507,935 $(71,417) $32,187,309
-------- ----------- -------- -----------
Stock issued under employee
stock purchase plan -- -- -- 68,464
Exercise of stock options -- -- -- 359,908
Tax benefit on exercise of stock options -- -- -- 398,485
Foreign currency translation -- -- (53,621) (53,621)
Net income -- 5,660,068 -- 5,660,068
-------- ----------- -------- -----------
Balance, April 30, 1998 $ -- $8,168,003 $(125,038) $38,620,613
-------- ----------- -------- -----------
</TABLE>
See accompanying notes.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 996,350 $ 3,597,617 $ 5,660,068
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization 231,487 1,057,348 1,385,616
Deferred income taxes (180,000) (104,000) (498,545)
Changes in assets and liabilities:
Receivables, net (2,996,564) (7,329,046) (5,986,276)
Inventories (2,803,818) (7,795,977) (758,482)
Prepaid expenses and other current assets (584,729) (328,011) (188,265)
Accounts payable and accrued liabilities 627,258 2,588,827 1,495,273
Income taxes payable 400,000 487,632 611,088
------------ ------------ ------------
Net cash provided by (used in) operating activities (4,310,016) (7,825,610) 1,720,477
INVESTING ACTIVITIES
Purchase of furniture and equipment (654,723) (1,716,583) (2,746,776)
Decrease (increase) in trademarks, patents and marketing rights (656,751) 83,671 (97,107)
------------ ------------ ------------
Net cash used in investing activities (1,311,474) (1,632,912) (2,843,883)
FINANCING ACTIVITIES
Proceeds from note payable to bank 114,119 3,446,718 852,145
Repayments of note payable to bank -- (3,560,837) (365,232)
Principal payments under capital lease obligations (121,563) (125,432) (177,392)
Net increase (decrease) in advances from factor (2,320,891) 562,551 188,663
Proceeds from note receivable from shareholder -- 44,520 --
Tax benefit from exercise of stock options -- -- 398,485
Issuance of preferred stock 1,039,625 -- --
Issuance of common stock 8,420,830 14,594,089 428,372
------------ ------------ ------------
Net cash provided by financing activities 7,132,120 14,961,609 1,325,041
Effects of foreign exchange rate changes on cash -- (71,417) (53,621)
------------ ------------ ------------
Net increase in cash 1,510,630 5,431,670 148,014
Cash, beginning of year 499,417 2,010,047 7,441,717
------------ ------------ ------------
Cash, end of year $ 2,010,047 $ 7,441,717 $ 7,589,731
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL INFORMATION
Cash paid during the year for interest $ 173,502 $ 176,191 $ 199,187
------------ ------------ ------------
------------ ------------ ------------
Cash paid during the year for income taxes $ 40,000 $ 991,500 $ 2,409,500
------------ ------------ ------------
------------ ------------ ------------
Noncash financing and investing activities:
Equipment acquired with capital leases $ -- $ 788,524 $ 335,022
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes.
<PAGE>
Notes to Consolidated Financial Statements
1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the Business
Cutter & Buck Inc. (the "Company") designs, sources and markets men's and
women's sportswear and outerwear apparel. The Company's trade customers are
principally golf pro shops and resorts, corporate sales accounts and better
specialty stores. During 1995, the Company changed its name from Jones/Rodolfo
Corporation to Cutter & Buck Inc.
In March 1996, the Company formed a wholly owned subsidiary, Cutter & Buck (UK)
Ltd., for the purpose of direct marketing, sales and distribution of Cutter &
Buck sportswear and outerwear in the United Kingdom. In May 1996, the Company
formed another wholly owned subsidiary, Cutter & Buck (Europe) B.V. to perform
the same function throughout Europe.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries from the date of formation. All
significant intercompany accounts and transactions have been eliminated.
Inventories
Inventories, which are predominantly finished goods, are valued at the lower of
cost or market, with cost determined under the first-in, first-out method.
Sample Costs
The Company defers costs to produce samples that relate to goods to be sold in
future selling seasons. Such costs are charged to expense in the season to
which the samples relate.
Furniture and Equipment
Furniture and equipment is carried at cost. Depreciation is provided on a
straight-line basis over estimated useful lives of five years. Furniture and
equipment acquired under capital leases is amortized on a straight-line basis
over the lesser of the lease term or the estimated economic useful life of the
asset. Store fixtures are depreciated on a straight-line basis over three
years.
Advertising
Advertising costs are expensed as incurred. Advertising expense was $1,256,000,
$800,000 and $326,000 for the years ended April 30, 1998, 1997 and 1996
respectively.
<PAGE>
Income Taxes
The Company accounts for income taxes using the liability method, whereby
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities measured using
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Concentrations of Credit Risk
The Company is subject to credit risk on receivables that are not factored.
These nonfactored receivables are geographically disbursed throughout the United
States, Europe and selected foreign countries where formal distributor
agreements exist. The Company sells its products to approved customers on an
open account basis, subject to established credit limits, cash in advance or
cash on delivery terms. Generally, the receivables are insured or are supported
by letters of credit.
Revenue Recognition
Revenue is recognized at the time the product is shipped to the customer. There
is no right to return for customers, other than for defective products.
Allowances for these estimated sales returns are provided when the related
revenue is recorded.
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies are translated to U.S.
dollars at the exchange rate on the balance sheet date. Revenues, costs and
expenses are translated at the average rates of exchange prevailing during the
year. Translation adjustments resulting from this process are shown separately
in shareholders' equity.
Stock-Based Compensation
The Company has elected to apply the disclosure-only provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation". Accordingly, the Company has elected to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Compensation expense for stock options
is measured as the excess, if any, of the market price of the Company's common
stock at the date of grant over the stock option exercise price. Under the
Company's plans, stock options are generally granted at fair market value.
Earnings Per Share
During fiscal 1998, the Company adopted SFAS No. 128, "Earnings Per Share."
SFAS No. 128 requires presentation of basic and diluted earnings per share.
Basic earnings per share is based on the weighted average number of common
shares outstanding. Diluted earnings per share is based on the weighted average
number of common shares and equivalents outstanding. Common share equivalents
included in the computation represent shares issuable upon assumed exercise of
outstanding stock options and warrants except when the effect of their inclusion
would be antidilutive.
<PAGE>
All earnings per share amounts are calculated in accordance with SFAS No. 128.
The effect of adopting the new Statement did not change the previously reported
amounts.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Reclassifications
Certain amounts from the prior year financial statements have been reclassified
to conform to the current year presentation.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About Segments
of the Enterprise and Related Information." The Company will adopt SFAS
Nos. 130 and 131 in the first quarter of fiscal 1999. The Company does not
expect the impact of SFAS Nos. 130 or 131 to be material.
2. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
<TABLE>
<CAPTION>
April 30,
------------------------------------
1997 1998
------------- ------------
<S> <C> <C>
Prepaid expenses $ 1,161,340 $ 1,082,914
Sample costs 265,643 419,720
------------- ------------
$ 1,426,983 $ 1,502,634
------------- ------------
------------- ------------
</TABLE>
3. ACCOUNTS RECEIVABLE
Pursuant to the terms of factoring agreements, the Company assigns a portion of
its qualifying accounts receivable to factors on a preapproved, nonrecourse
basis and a portion on a recourse basis. The factors' charges, totaling
$194,945 for the year ended April 30, 1998 ($160,643 in 1997 and $255,393 in
1996), include a commission on net sales and interest on advances at prime, plus
1-1/2% (10.0% at April 30, 1998). The Company is permitted to receive advances
from the European factor against uncollected amounts factored. Accounts
receivable consisted of the following:
<TABLE>
<CAPTION>
April 30,
---------------------------
1997 1998
------------ -----------
<S> <C> <C>
Unmatured receivables
Nonrecourse $ 2,704,702 $ 2,622,705
With recourse 13,765 1,945,238
Matured receivables 213,019 290,112
<PAGE>
Advances (562,551) (751,214)
------------ -----------
Due from factor 2,368,935 4,106,841
Nonfactored receivables 12,478,734 17,297,693
Allowance for doubtful accounts and
reserve for sales returns and allowance (428,561) (1,187,813)
----------- -----------
$14,419,108 $20,216,721
----------- -----------
----------- -----------
</TABLE>
4. FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following:
<TABLE>
<CAPTION>
April 30,
-------------------------
1997 1998
---------- ----------
<S> <C> <C>
Leasehold improvements $ 166,293 $ 585,906
Equipment 1,618,871 3,074,654
Store fixtures 1,281,447 2,466,500
Furniture and other fixtures 750,681 759,073
----------- ----------
3,817,292 6,886,133
Less accumulated depreciation and
amortization (1,171,274) (2,317,618)
----------- ----------
$2,646,018 $4,568,515
----------- ----------
----------- ----------
</TABLE>
The total cost of leased equipment capitalized at April 30, 1998 and 1997 was
$1,123,546 and $788,524, respectively, with related accumulated depreciation
of $325,387 and $135,683, respectively.
5. LINE OF CREDIT
On February 20, 1997, the Company entered into a loan agreement with
Washington Mutual Bank d/b/a Western Bank ("Western Bank") for a $20 million
line of credit, replacing the Company's previous line of credit. The line of
credit with Western Bank is to be used for international letters of credit,
working capital advances and other corporate purposes. Interest on
borrowings is charged and payable monthly at Western Bank's prime rate. The
line of credit is collateralized by a security interest in the Company's
inventory, accounts receivable, contract rights and general intangibles and
expires on August 1, 1998. The loan agreement contains certain restrictive
covenants covering minimum working capital and tangible net worth, as well as
a maximum debt-to-equity ratio. Western Bank and Republic Business Credit
Corporation have entered into an intercreditor agreement allocating between
them priority as to the Company's assets in which both financial institutions
have a security interest. At April 30, 1998, letters of credit outstanding
against this line of credit totaled $9,793,530 and there were no working
capital advances.
On February 24, 1998, the Company's European subsidiary entered into a loan
agreement with Cooperatieve Rabobank "Huizen" B.A. ("Rabobank") for a $1.8
million line of credit. The line of credit with Rabobank is to be used for
international letters of credit and working capital advances. Interest on
borrowings is charged and payable quarterly at a variable rate (4.95% at April
30, 1998). The line of credit is secured by the Company's European inventory,
an irrevocable standby letter of credit issued by Western Bank of $1.6 million
and subordination of $2.2 million of intercompany debt. At April 30, 1998,
letters of credit outstanding against this line of credit totaled $455,381 and
working capital advances totaled $486,913.
6. INCOME TAXES
<PAGE>
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Year Ended April 30,
-------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Current tax provision:
Federal $ 340,000 $1,514,600 $3,318,545
State 100,000 200,000 100,000
---------- ---------- ----------
440,000 1,714,600 3,418,545
Deferred federal tax benefit (180,000) (104,000) (498,545)
---------- ---------- ----------
$ 260,000 $1,610,600 $2,920,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The provision for income taxes differs from the amount of tax determined by
applying the federal statutory rate for the following reasons:
<TABLE>
<CAPTION>
Year Ended April 30,
--------------------------------------
1996 1997 1998
--------------------------------------
<S> <C> <C> <C>
Tax provision at federal statutory tax rate $ 427,159 $1,770,749 $2,917,223
Foreign loss not benefited - 33,065 73,002
Nondeductible expenses - 18,862 17,834
Decrease in valuation allowance (259,569) (440,278) ---
State income taxes, net of federal benefit 66,000 132,000 66,000
Other 26,410 96,202 (154,059)
---------- ---------- ----------
$ 260,000 $1,610,600 $2,920,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The Company recorded a compensation expense in 1998 for income tax purposes
of approximately $1.1 million resulting from the exercise of nonqualified
stock options. The resulting tax benefit of $398,485 is included in
shareholders' equity.
The 1996 and 1997 tax provisions are recorded net of the benefit of utilizing
net operating loss carryforwards (approximately $500,000 in 1996 and
$1,139,000 in 1997). Significant components of the Company's deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
April 30,
-----------------------
1997 1998
-------- --------
<S> <C> <C>
Deferred income tax assets:
Reserve for doubtful accounts $145,710 $337,339
Reserve for inventory obsolescence 33,247 140,290
Unicap 65,749 195,897
Other 50,842 112,944
-------- --------
Total deferred income tax assets 295,548 786,470
Deferred income tax liabilities:
Accelerated depreciation (11,548) (3,925)
-------- --------
Total deferred income tax liabilities (11,548) (3,925)
-------- --------
Net deferred taxes $284,000 $782,545
-------- --------
-------- --------
</TABLE>
7. COMMITMENTS
The Company leases its office facilities, a retail store and a warehouse and
embroidery production facility under operating leases. Total rent expense
amounted to $217,292 in 1996, $472,823 in 1997 and $684,270 in 1998.
<PAGE>
Future minimum payments, by year and in the aggregate, under capital leases
and noncancelable operating leases with initial or remaining terms of one
year or more consisted of the following at April 30, 1998:
<TABLE>
<CAPTION>
Year ending April 30, Capital leases Operating leases
-------------------- -------------- ----------------
<S> <C> <C>
1999 $ 308,859 $636,193
2000 275,778 542,445
2001 264,432 429,121
2002 107,588 199,325
2003 40,515 145,734
---------- ----------
Total mimimum lease payments 997,172 $1,952,818
Less amount representing interest (176,450) ----------
Present value of net minimum ---------- ----------
lease payments $ 820,722
----------
----------
</TABLE>
8. SHAREHOLDERS' EQUITY
Preferred Stock: During fiscal 1995, the Company authorized the sale of
1,200,000 shares of Series B Preferred Stock to qualified investors at $2.74
per share. As of April 30, 1995, 735,510 shares of Series B Preferred Stock
were issued and outstanding. During fiscal 1996, an additional 403,618
shares of Series B Preferred Stock were sold. Of the total, 933,148 shares
were sold through subscription agreements. Proceeds to the Company, net of
offering expenses of $142,117, amounted to $2,979,094. The remaining 205,980
shares were issued as a result of the conversion of a loan and note payable
to shareholders and accrued interest, aggregating $564,385.
Conversion of the Preferred Stock into Common Stock occurred automatically
upon the closing of the Company's initial public offering of Common Stock.
Effective as of the closing of the initial public offering, every 2.162
shares of Preferred Stock were converted into one share of Common Stock.
Common Stock: On July 20, 1995, the Company's shareholders adopted Restated
Articles of Incorporation and Bylaws affecting shareholders' equity,
including increasing the number of authorized shares of Common Stock to
25,000,000, increasing the number of authorized shares of Preferred Stock to
6,000,000 and implementing a 1 for 2.162 reverse stock split of the issued
and outstanding shares of Common Stock. The number of shares of Common Stock
presented in the accompanying consolidated financial statements has been
restated to reflect the stock split.
In August 1995, the Company sold 1,250,000 shares of Common Stock at an
initial public offering price of $7 per share. Pursuant to the exercise of
the underwriters' over-allotment option, the Company sold an additional
205,875 shares of Common Stock at $7 per share in September 1995. Proceeds
to the Company, net of offering expenses of $1,770,295, amounted to
$8,420,830.
On November 1, 1996 the Company sold 1,329,307 shares of its Common Stock to
the public at $11 per share. Pursuant to the exercise of the Underwriters'
over-allotment option, the Company sold an additional 125,000 shares of
Common Stock at $11 per share on December 3, 1996. Proceeds to the Company,
net of underwriting discounts and commissions and offering expenses totaling
$1,434,356, amounted to $14,563,021.
Common Stock Warrants: In connection with the Company's initial public
offering, the Company issued warrants to the underwriters of the offering to
purchase 131,531 shares of Common Stock at an exercise price of $8.40. In
April 1997, 52,612 of these warrants were exercised in a cashless
transaction, and 26,767 shares of Common Stock were issued. The remaining
warrants to purchase 78,919 shares were exercised in May 1998 with proceeds
to the Company totaling $662,920.
Stock Option Plans: The Company has four stock option plans that provide for
the granting of options to employees, officers and directors of the Company
to purchase up to 875,313 shares of Common Stock. Options granted under the
1991 plan provide for 50% vesting on the first anniversary from the date of
<PAGE>
grant and 25% vesting on each of the second and third anniversaries. Options
granted under the 1995 employee plan generally provide for vesting over a
four-year period with vesting at 25% each year. Options granted under the
1995 director plan become exercisable six months after the date of grant.
Options granted under the 1997 plan generally provide for vesting over a
five-year period with vesting at 20% each year. Options under the plans
expire after 10 years and have been granted at fair value on the date of
grant.
The fair value of stock options used to calculate pro forma net income and
net income per share disclosures was determined using the Black-Scholes
option-pricing model with the following assumptions in effect on the option
grant date: risk-free interest rate of 5.5% to 6.8%; expected volatility of
49% to 68%; expected holding period of 3 to 5 years from the vest date; and a
dividend yield of 0.0%. Had compensation been recognized based on the fair
value at the date of grant for options awarded under the plan, pro forma
amounts of the Company's net income and net income per share would have been
as follows:
<TABLE>
<CAPTION>
April 30,
-------------------------------------
1996 1997 1998
-------- --------- ----------
<S> <C> <C> <C>
Net income $996,350 $3,597,617 $5,660,068
Pro forma compensation expense under
SFAS No. 123 (41,476) (177,457) (544,717)
-------- ---------- ----------
Pro forma net income under SFAS No. 123 $954,874 $3,420,160 $5,115,351
-------- ---------- ----------
-------- ---------- ----------
Pro forma diluted earnings per share $ 0.27 $ 0.73 $ 0.93
</TABLE>
Under SFAS No. 123, compensation expense representing the fair value of the
option grant is recognized over the vesting period. The initial impact on
pro forma net income may not be representative of compensation expense in
future years, when the effect of the amortization of multiple awards would be
reflected in earnings.
A summary of the Company stock option activity and related information is as
follows:
<TABLE>
<CAPTION>
April 30,
----------------------------------------------------------------------------
1996 1997 1998
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year 252,074 $ 2.16 407,322 5.08 438,758 $ 5.78
Granted 155,248 9.82 37,248 13.05 174,248 18.84
Exercised -- -- (5,812) 3.19 (88,528) 4.06
Canceled -- -- -- -- (8,250) 10.75
----------- ----------- -----------
Balance, end of year 407,322 $ 5.08 438,758 $ 5.78 516,228 $ 10.40
----------- ----------- -----------
----------- ----------- -----------
Exercisable at end of year 142,224 $ 2.16 246,317 $ 3.74 270,267 $ 5.09
</TABLE>
<PAGE>
The following information is provided for options outstanding and exercisable at
April 30, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------------------------------- --------------------------
Weighted Average
----------------------------------------
Range of Exercise Remaining Weighted Average
Prices Options Contractual Life Exercise Price Options Exercise Price
- ----------------- ------- ---------------- -------------- ------- ---------------
<S> <C> <C> <C> <C> <C>
$ 2.16 - $ 4.74 191,169 5.9 $ 2.27 189,145 $ 2.24
7.13 - 10.75 120,499 7.9 10.61 62,562 10.48
12.13 - 13.63 32,624 8.8 12.97 11,624 13.17
15.00 - 20.56 171,936 9.3 18.82 6,936 20.56
------- -------
516,228 270,267
------- -------
------- -------
</TABLE>
At April 30, 1998, 263,649 shares were available for future grant and 780,627
shares were reserved for future issuance.
Employee Stock Purchase Plan: In December 1995, the Company adopted an
Employee Stock Purchase Plan which allows eligible employees to buy Company
stock at a 15% discount from market price utilizing payroll deductions. As
of April 30, 1998, 8,667 shares had been issued under the plan and 241,333
shares have been reserved for future issuance.
9. EMPLOYEE BENEFITS
Effective January 1, 1995, the Company implemented a salary deferral 401(k)
plan for substantially all of its employees. The plan allows employees to
contribute a percentage of their pretax earnings annually, subject to
limitations imposed by the Internal Revenue Service. The plan also allows
the Company to contribute an amount at its discretion. To date, the Company
has made no contributions to the plan.
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Year Ended April 30,
-------------------------------------
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted earnings
per share -- net income $ 996,350 $3,597,617 $5,660,068
--------- ---------- ----------
--------- ---------- ----------
Denominator:
Denominator for basic earnings
per share -- weighted average common shares 3,232,132 4,387,636 5,234,376
Effect of dilutive securities stock options 244,397 281,503 294,657
--------- ---------- ----------
Denominator for diluted earnings per share 3,476,529 4,669,139 5,529,033
--------- ---------- ----------
--------- ---------- ----------
BASIC EARNINGS PER SHARE $ 0.31 $ 0.82 $ 1.08
DILUTED EARNINGS PER SHARE $ 0.29 $ 0.77 $ 1.02
</TABLE>
<PAGE>
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Financial results by quarter for the fiscal years ended April 30, 1997 and 1998
are as follows:
<TABLE>
<CAPTION>
Fiscal Quarter Ended
----------------------------------------------
July 31 October 31 January 31 April 30
--------- ----------- ----------- ---------
(in thousands, except share amounts)
<S> <C> <C> <C> <C>
1997
Net sales $ 8,000 $ 12,290 $ 8,452 $ 17,851
Gross profit 2,980 4,796 3,489 7,274
Net income 142 865 324 2,267
Diluted earnings per share $ 0.04 $ 0.22 $ 0.06 $ 0.42
1998
Net sales $ 12,378 $ 17,349 $ 14,151 $ 26,226
Gross profit 4,960 7,145 5,952 11,405
Net income 475 1,160 673 3,352
Diluted earnings per share $ 0.09 $ 0.21 $ 0.12 $ 0.60
</TABLE>
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
Cutter & Buck Inc.
We have audited the accompanying consolidated balance sheets of Cutter & Buck
Inc. as of April 30, 1998 and 1997, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended April 30, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cutter & Buck Inc.
at April 30, 1998 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended April 30, 1998,
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
(SIGNATURE)
Seattle, Washington
June 12, 1998
<PAGE>
Exhibit 23.1
Consent Of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Cutter & Buck Inc. of our report dated June 12, 1998, included in the 1998
Annual Report to Shareholders of Cutter & Buck Inc.
Our audits also included the financial statement schedule of Cutter & Buck Inc.
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8) pertaining to the 1995 Employee Stock Option Plan, 1995
Nonemployee Director Stock Incentive Plan, 1995 Employee Stock Purchase Plan
and the 1997 Stock Incentive Plan of our report dated June 12, 1998, with
respect to the consolidated financial statements of Cutter & Buck Inc.
incorporated herein by reference, and our report included in the preceding
paragraph with respect to the financial statement schedule included in this
Annual Report (Form 10-K) for the year ended April 30, 1998.
/s/ ERNST & YOUNG LLP
Seattle, Washington
July 24, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> APR-30-1998
<CASH> 7,589,731
<SECURITIES> 0
<RECEIVABLES> 20,216,721
<ALLOWANCES> (1,187,815)
<INVENTORY> 13,247,892
<CURRENT-ASSETS> 43,339,523
<PP&E> 4,568,515
<DEPRECIATION> (2,317,618)
<TOTAL-ASSETS> 48,144,367
<CURRENT-LIABILITIES> 8,897,072
<BONDS> 0
0
0
<COMMON> 30,577,648
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 48,144,367
<SALES> 70,104,015
<TOTAL-REVENUES> 70,104,015
<CGS> 40,642,031
<TOTAL-COSTS> 40,642,031
<OTHER-EXPENSES> 20,958,986
<LOSS-PROVISION> 518,277
<INTEREST-EXPENSE> (134,579)
<INCOME-PRETAX> 8,580,068
<INCOME-TAX> 2,920,000
<INCOME-CONTINUING> 5,660,068
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,660,068
<EPS-PRIMARY> $1.08
<EPS-DILUTED> $1.02
</TABLE>
